BU127 Final Notes
Adjusting Entries:
 Deferred revenues: previously
recorded liabilities that were created
when cash was received in advance
& must be reduced from revenue
earned during the period
 Accrued revenues: revenues that
have been earned but not yet paid for
Accounting for Sales Revenue
 Ownership is transferred when goods
are shipped free on board (FOB)
o FOB shipping point  title
changes hands at shipment,
buyer pays for shipping
o FOB destination point 
title changes hands on
delivery, seller pays for
shipping
Revenue Recognition of Bundled Goods & Services
 When providing more than 1
good/service
o Step 1: ID contract between
company & customer
o Step 2: ID performance
obligations (promised
goods/services)
o Step 3: Determine
transaction price
Sales on Credit
 Advantages of using credit cards (for
firms)
o Increase sales
o Avoided provided credit
directly to customers
o Avoid losses due to bad
cheques
 Deferred expenses: assets that have
already been paid but expense not
yet incurred
 Accrued expenses: expenses that
have been incurred but not paid for
 Revenues from FOB shipping point
 recognized at shipment
 Revenues from FOB destination
point  recognized on delivery
 Significant Account Policies
o Location where companies
disclose specific revenue
recognition policies used (in
in notes to financial
statements)
o Step 4: Allocate transaction
price to performance
obligations
o Step 5: Recognize revenue
when each performance
obligation is satisfied (or over
time if a service is provided
over time)
o Avoid losses due to
fraudulent credit card sales
o Receive payment quicker
 Credit Card Discount (contra-
revenue/expense account)
 o Fee charged by credit card o Net Sales = sales revenue,
company to firms that accept Less: credit card discounts
payments on credit cards
Sales Discounts to Businesses
 Sales (or cash) discount  cash  Sales Revenue
discount to incentivise quicker o Less: Sales discounts (% x
payment of debts sales revenue)
Sales Returns & Allowances
 Deducted from gross sales revenue when determining net sales
Measuring & Reporting Receivables
 3 common classifications
o Statement of Financial Position – receivables are classified as either current or
non-current assets
o Receivable can be account or note receivable
o Receivables can be trade or non-trade receivables
 Note receivable  written promise to pay with specified terms
 Trade receivable  amounts owed to business for normal credit sales of goods/services
 Non-trade receivable  amounts owed to business for other than normal business
transactions
Accounting for Bad Debts
 Bad Debts  result from credit customers who won’t pay amounts owed
 Bad debt expense  account holding estimated value of debts uncollectible
o Adjusting entry at end of every period, matches bad debt expense with sales
revenue
 Bad debt expense (doubtful accounts expense)  expense associated w estimated
uncollectible AR (recorded via adjusting journal entry at end of period)
Allowance for Doubtful Accounts
 Allowance for doubtful accounts  contra-asset account containing estimated
uncollectible AR
o Bc contra-asset: balance is subtracted from balance of AR & decrease NRV of
AR & total assets
Recover of Previously Written Off Debts
 Net effect of recovered amount
on AR is 0
 Recovered amount is first
recorded in AR to reinstate $
value, then removed
Summary of Recording Bad Debts
 Step 1: Record estimated bad
debts adjustment

2
  Step 2: ID & write off actual bad debts
 Step 3: Record recovery of previously written off bad debts
Estimating Bad Debts
 Recorded as adjusting entry (end of period)
o Percentage of total credit sales for period
o Aging of AR
 Percentage of credit sales is simple to apply | aging method is more accurate
Percentage of Credit Sales Method
 Directly compute amount to be recorded in adjusting entry as bad debt expense for
period
Average % of credit sales resulting in bad debts = total bad debts ÷ total credit sales
Aging AR Method
 Compute estimated ending balance of allowance for doubtful accounts
 Difference between current balance in account & estimated balance is recorded as
adjusting entry for bad debt expense for the period
Uncollectible AR ÷ estimated % uncollectible
Actual Write-Offs Compared with Estimates
 Amount of uncollectible accounts ≠ estimated amount previously recorded
 Error in estimated bad debts is considered before determining bad debt expense at end
of next period
 When estimates are incorrect, financial statement values for prev period are NOT
corrected
Internal Control & Management Responsibility
 Internal Control  systematic minimization of risks of both types of financial fraud
(misappropriation of assets & material misstatement of reported financial information)
Control over AR
 Minimizing Bad Debts
o Require approval of customer’s credit history
o Monitor age of AR & contact customer w/ overdue payments
o Reward sales & collection employees for speedy collection (encourages
teamwork)
Cash & Cash Equivalents
 Cash  # or any form of currency accepted by banks & immediate credit to company’s
accounts (cheques, money order, bank drafts, etc.)
 3 categories
o Cash on hand
o Cash deposited in banks
o Other instruments that meet definition (such as cybercurrency)

3
  Cash Equivalents  short-term & highly liquid assets w/ insignificant risk of value
change (cybercurrency, bank certificates of deposits, treasury bills, etc.)
Cash Management
1. Accurate accounting (to prepare statement of cash flows & balances)
2. Controls to ensure enough cash is on hand to meet
a. Current operating needs
b. Maturing liabilities
c. Unexpected emergencies
3. Prevention of accumulated excess idle cash (doesn’t earn revenue)
Separation of Duties
 Separation of tasks of receiving cash & disbursing cash (those depositing cash cannot
sign cheques)
 Separation of procedures of accounting for cash receipts & cash disbursements (people
handling sales returns do not create fake returns to conceal shortages)
 Separation of physical handling of cash & all phases of accounting function (those
receiving or paying cash have no authority to make accounting entries)
Internal Cash Control
 Cash Budget  forecast of receipts, disbursements, & balances for year
 Cash Receipts  list of cash receipts (daily), all receipts deposited daily, all cash on
hand under strict control (minimize loss to theft)
 Cash Payments  separate approval of purchases and actual payments
 Independent Internal Verification  independent supervisor compares cash receipts to
bank deposits & cheques, monthly bank reconciliation
 Rotation of Duties  mandatory breaks/vacations & rotate duties (any fraud will be
paused or stopped)
Bank Reconciliation
 Bank statements are provided monthly by bank including
o Each
paper/electronic
deposit recorded by
bank during period
o Each
paper/electronic
cheque cleared by
bank during period
o Charges/deductions
(such as service
charges) made
directly 
company account
o Balance in
company account
 Indirect Method: Statement of Cash Flows

4
 o Reconciles net profits
o Net increase in AR  cash collected from customers < revenue  subtract
decrease in AR
 Common causes of differences between ending bank balance & ending book balance
o Bank Service Charges
o NSF (non-sufficient funds) cheques
o Interest
o Deposits in transit
o Outstanding cheques
o Errors
 Preparing bank reconciliation
o ID bank changes & credit not recorded on books
o ID deposits in transit
o ID outstanding cheques
o ID outstanding cheques
o Determine impact of errors
 All additions/deduction on company books side of reconciliation need journal entries (but
not on bank statement)
Inventory
 Tangible property
o Held for sale in normal course of business OR used to produce goods/services
 Current assets (liquidates within a year)
 Merchandise Inventory
o Goods held for resale
o Finished condition (can be sold without changes)
 Manufacturers
o Raw Material Inventory
 Item acquired for processing  finished goods
 Once processed  Work in Process Inventory
o Work in Process Inventory
 In process of being manufactured but not complete
 Once completed  Finished Goods Inventory
o Finished Goods Inventory
 Goods that are complete & ready for sale
 Inventory is recorded at cost
 Inventory Cost = Sum of costs incurred when bringing at item to usable/saleable
condition/location
 Cost of Purchased Raw Material/Merchandise Inventory
o Invoice amt
+ freight charges
+ inspection & prep. costs
- purchase returns & allowances
- purchase discounts taken
= Inventory Cost
 Stop recorded purchases costs when

5
 o Raw materials are ready for use
o Merchandise inventory is read for shipment
 Costs incurred AFTER inventory is ready for use is recorded in selling, general, &
administrative expenses
Flow of Inventory Costs
Stage 1: Purchasing/Production Stage 2: Addition to Inventory on Stage 3: Sale
Activities the Balance Sheet - COGS
Merchandiser

Merchandise purchased  Merchandise inventory  CGS (expense)

(asset)
Manufacturer
Raw material purchased  Raw material Work in process Finished goods
inventory  inventory  inventory 
(asset) (asset) (asset)
Direct labour incurred  Work in process Finished goods inventory CGS (expense)
inventory  
(asset) (asset)
Factory overhead incurred  ^^^^^^^^^^^^^^^^^^^
Direct Labour  earnings of employees directly working on manufacturing products
Factory overhead  all manufacturing costs (not raw materials or direct labour)
CGS:
Beginning inventory (BI)
+ purchases (P)
= Goods Available for Sale
Inventory sold = CGS (income statement)
CGS = BI + P – EI
Inventory Systems
Perpetual Inventory System
 Inventory is increased w purchases
 Inventory is decreased & CGS is increased w sales
Periodic Inventory System
 Physical count to determine CGS
Purchase Returns and Allowances & Purchase Discounts
 Purchase returns and allowances treated as reduction in cost of inventory purchases
associated w unsatisfactory goods

6
  Cash discount must be recorded for by buyers & seller
Inventory Costing Methods
1. Specific Identification
o Cost of sales = sum of cost of each item sold individually
o Cannot be used when units are identical (manipulation w/o electron tracking)
o Prohibited w large # of inventory items
that are interchangeable
o Used for expensive items (aircraft,
yachts, fine arts, buildings, luxury cars,
etc.)
2. FIFO
3. Weighted Average
o For every unit sold: average cost of
each unit is assigned to cost of sales
o Avg Cost per Unit = CGS Available
for Sale ÷ # Units Available for sale
o Ending Inventory = Units in Ending
Inventory x Avg Cost per Unit
o CGS = Units Sold x Avg Cost per
Unit
Advantages
o FIFO  Ending inventory approximates
current replacement costs
o Weighted Avg  smooths price of changes
Cash Flow Assumption
 FIFO assumes earliest goods purchased are first sold & last ones purchases remain
(oldest unit costs  cost of sales, newest  ending inventory)
Choosing Inventory Methods
 Effect on net earnings (higher earnings)
 Effect on income taxes (least-latest rule – least amount as late as possible)
Lower Cost & Net Realizable Value
 Ending Inventory is reported at LCNRV on PER UNIT basis
NRV
expected sales price
- estimated sales cost
= NRV
 If NVR of inventory items that were written down increases in a future period bc of
economic circumstances  amt written down is reversed up to original cost so carrying
amount of inventory is lower of LCNRV
Internal Control of Inventory

7
 Protecting Inventory
1. Separating responsibilities for inventory accounting & physical handling of inventory
2. Theft/damage proof storage
3. Allow access to authorized employees
Accurate Reporting of Inventory Costs
4. Maintain perpetual records
5. Compare perpetual & periodic counts
Errors in Measuring Ending Inventory
Beginning inventory
+ purchases
- ending inventory
= Cost of Sales
Inventory & Cash Flows
Net Earnings
+ decrease in inventory
+ increase is AP
Less: increase in inventory
Less: decrease in AP
= Cash Flows from Operations
Cost Flow Assumption – Periodic Inventory System
 Cost isn’t recorded at sale
 Cost of all goods sold during period is recorded at end of period
 Cost of ending inventory is first determined by physical count x unit cost
Perpetual Periodic
Beginning inventory (carried over from period period) Beginning inventory (carried over from period period)
+ Purchases for the period (accumulated in an inventory + Purchases for the period (accumulated in a purchases
accounts) account)
= Cost of Goods Available for Sale = Cost of Goods Available for Sale
Less: Cost of Sales (measured at every sale, based on Less: Ending inventory (measured at end of period,
perpetual record) passed on a physical inventory count)
= Ending inventory (perpetual record updated at every = Cost of sales (computed as a residual amount
sale)
EI = BI + PUR - COS COS = BI + PUR – EI
DEDUCT purchase returns and allowances & discounts from PURCHASES
Classification of Long-Lived Assets

8
  PP&E, intangible assets
 Non-current assets (on statement of financial position)
 Includes tangible assets, intangible assets, & goodwill
 Intangible Assets  intellectual efforts (intellectual property)
o Copyrights, patents, licenses, trademarks, software, subscription lists
 Goodwill  only reported during acquisition of another business, reflects difference
between price paid & actual valuation
Measuring & Recording Acquisition Cost
 Cost Principal
o All costs incurred in acquiring long-lived asset is recorded in an asset account
(sales taxes, legal fees, transportation, installation costs, etc.  added to purchase price)
o Expenses are capitalized (recorded as part of total cost of asset, not expenses)
Acquisition by Construction
 Once ready for use  accumulated construction costs depreciate over productive life
 Capitalized Interest  intrust included in cost of construction
 Capitalizing labour, material, & interest expense  increase assets & net earnings,
decrease expenses
Acquisition as Basket Purchases
 Cost of each asset is recorded separately (land doesn’t depreciate but
buildings/equipment do at different rates)
Repairs, Maintenance, & Betterments
 Expenditure  payment to acquire goods/services, recorded as either asset (future
benefit) or expenses (current benefit)
o Ordinary repairs/maintenance/revenue expenditures
o Extraordinary repairs/betterments
o Maintain productive capacity during current period  expense
 If for a long-lived asset  recorded as expenditures (not expense)
Extraordinary Repairs & Betterments
 Expenditures that increase productive life, operating efficiency, or capacity
 Capital Expenditures  benefit in future periods (asset account NOT expense)
Depreciation
 Allocation of acquisition cost as an expense
 Contra-account to asset  Accumulated depreciation (deducted from asset cost)

9
  Carrying Amount (book value) = acquisition cost less: accumulated depreciation
Calculating
Depreciation
Expense
 For DDB,
accumulated
depreciation
NOT residual
value is used
in formula
 In last year of
useful life,
regardless of
depreciation
expense,
carrying amount MUST = residual value
Depreciation Expense = carrying amount x declining balance rate
Declining balance rate = 2 ÷ useful life
Changes in Depreciation Estimates
 When useful life or residual value needs to change  underdepreciated asset balance
(less residual value at that date) should be apportioned over reaming useful life from
current year
 Calculate new depreciation expense
o Substitute carrying amount for original acquisition cost
o Substitute new residual value for original amount
o Substitute estimated remaining useful life for original estimated useful life
Depreciation & Income Tax
 Capital Cost Allowance (CCA)
o Provides rapid write-off of an asset’s cost to stimulate new investments
 Measuring Asset Impairment
o Casualty
o Obsolescence
o Lack of demand for asset’s services
 Step 1: Test for impairment
o If carrying amount > recoverable amount  asset is impaired
 Step 2: Computation of impairment loss
o Impairment loss = carrying amount – recoverable amount
Disposal of PP&E
 2 entries: adjusting entry (update depreciation expense & accumulated depreciation)
& entry to record disposal
Acquisition & Depletion of Natural Resources

10
  Natural resources aka wasting assets
 When site enters production, accumulates costs are depreciated over productive life
 Depletion Rate
o Same as units of production method
o Acquisitions are recorded in separate asset account & depreciated (not depleted)
Depletion Rate = Total acquisition & development costs (less estimated residual value) ≥
estimated units that can be withdrawn
Acquisition & Amortization of Intangible Assets
 Recorded at historical cost ONLY if purchased
 If developed internally  development is expense
 Amortization
o If intangible has definite life  straight line basis
o If intangible has indefinite life  not amortized
 Trademark  renewed every 15 yrs
o If purchased w definite life  amortized on straight line (up to 40 yrs)
 Patent  20 yrs & Copyright  50 yrs post-mortem
o If purchased  recorded at cost
o Costs incurred to significantly change product/process  amortized over shorter
of economic life or remaining legal life
 Franchises  intangible asset
 Technology  intangible asset
o Costs related to acquisition of domain/developing graphics
o Computer software costs incurred during concept phase
o Once feasibility is reached costs of development  capitalized as intangible
asset
 R&D  if developed internally  intangible asset (cost of development is expense)
o When feasibility is reached  costs are deferred & amortized over lifetime
 Leaseholds
o Only recorded if advance payment, otherwise  periodic payments (rent
expense)
o Leasehold improvements  long-term alternations (recorded at cost &
amortized over useful life)
Definition & Classification of Liabilities
 Current Liabilities
o AP, Deferred revenue, Accrued liabilities (expenses incurred but not paid)
 Accrued liabilities – salaries
 Accrued salaries payable
 Payroll taxes
o Income taxes withheld (current liability until paid to govt)
o EI
o CPP – matched by employer, 140% of EI deduction
Income Taxes

11
  Federal Goods & Services Tax (GST)  5%
 Provincial Sales Tax (PST)  0-10%
 Harmonized Sales Tax (HST)  combined GST & PST
Notes Payable
Interest  TVM
To borrow  interest reflects cost of using someone else’s $  expense
Principial  Principal Due (aka Maturity Date)  Date interest due
Annual Interest Rate  interest gained annually
Interest Payable  date(s) interest is payable
Accrued Interest = principal x annual interest rate x (months passed ÷ 12)
Working Capital
 Liquidity  ability to meet current obligations (measured by working capital)
Working capital = current assets – current liabilities
 Too little  not enough to meet  Too much  resources may be tied
current obligations up in unproductive assets
PV of Annuity & Single Payment
 Step 1: PV of annuity
 Step 2: PV of single amount
 Step 3: add totals
 Sum = PV of all cash payments that must be made
Short Term Lease
 Offers renewals & extensions but NOT option to purchase @ end of term
Long Term Lease
 Finance leases (ONLY 1 criterion must be met for effective control (all risks & rewards
of ownership) to transfer to lease)
o Lease transfers ownership of asset to lessee by end of term
o Lease grants lessee option to purchase & lessee is reasonably certain to do so
o Lease term is for majority of remaining economic life of asset
o PV of sum of lease pmt + residual value guaranteed by lessee ≥ fair value of asset
(PV of lease pmts & residual costs ≥ fair value @ end of term)
o Asset is specialized (no expected alternative use to lessor @ end of term)
 Operating leases
o NONE of above criteria are met – effective control remains with lessor
Recording Leases
 Require recognition of a lease asset & lease liability
 Amt recognized is current cash equivalent of required future lease payments
o PV of sum of lease payments
Bonds

12
 Annual Interest Payment = face value x coupon rate x (# of months between periods ÷ 12)
 If interest is paid more than once per year  coupon rate must be converted to rate per
interest period & multiplied by par value
Semi-annual Interest Payments = face value x coupon rate x ½
 Risk & Return
o Interest rate vs security status
 Lower interest rate on coupon for greater security (pledging an asset in
case firm cannot pay bond)
 Low interest rate for unsecured status BUT opportunity to convert bond to
common stock in future
 Bond Indenture  legal document specifying all details of bond offering
 Bond Prospectus  specifies maturity date, interest rate, date of interest payments,
other characteristics, & any covenants
 Bond Certificate  documents investors receive on purchase of bond securities
 Bond Trustee  appoint to represent bondholders, ensures issuing company fulfills all
requirements of bond contract
Bond Types Bond Characteristics
Unsecured bond (debenture) No assets pledged as ‘insurance policy’ for
repayment at maturity
Secured bond Specific assets are pledged as ‘insurance
policy’ for repayments at maturity
Callable bond Feature that allows bond issuer option of
retiring bonds early
Convertible bond Feature that allows bonds to be converted 
shares of issuer’s common stock
Issuing Price of Bonds
PV(bond) = PV(principal) + PV(interest payments)
 Investors demand ROI (market interest rate) to compensate for risk related to bond
offering
 Investors will always earn market rate of return regardless of how bond sells (par,
discount, premium)
Market Rate = Rate of Demand by Investors = market rate when calculating PV
Bond Contract Market Rate Bond Price
Coupon rate > market rate Discount

Coupon rate = market rate Par
Coupon Rate

Coupon rate < market rate Premium

Bonds Issued at Par
 If interest payment date is AFTER end of fiscal year  payment accrued

13
Bonds Issued at Discount
 Computing bond issue price
1. Calculate PV of face value paid at maturity (use CURRENT market rate NOT
coupon rate)
2. Calculate PV of interest payments (using CURRENT market rate NOT coupon
rate)
3. Add together
 Difference between face value & bond issue price at market rate is discount value
Interest Expense on Bonds issued at Discount
Discount on bond = face value – issue price
 Amortization  process of incrementally adding discount to interest expense
 Amortization of Discount
o Added to book value of liability each period
o Added incrementally (reflect in interest expense)
o Causes balance in discount to be reduced each period
 Cash paid to bondholders reflects coupon rate
 At maturity  book value = face value
 Effective Interest Amortization
o Method used to record interest expense for bonds (required by GAAP)
Interest expense = book value of bonds x market rate of interest on date of issuance
Book value = face value of bonds – unamortized discount (remaining discount AFTER
adjustment)
= book value of bonds + amortized amount
Bonds Issued at a Premium
 Computing bond issue price
1. Calculate PV of face value paid at maturity (using CURRENT market rate NOT
coupon rate)
2. Calculate PV of interest payments (using CURRENT market rate NOT coupon
rate)
3. Add together
Bond premium = book value – face value
Interest Expense on Bonds Issued at a Premium
 Amortization  process of incrementally subtracting premium from interest expense
each period
 Amortization of Premium  causes interest expense to reflect market rate
 Cash paid to bondholders reflects coupon rate
 At maturity  book value = face value
 Recorded using effective interest amortization method (straight line amortization)
Interest expense = book value of bonds + unamortized discount (remaining discount AFTER
adjustment)
= book value of bonds – amortized amount

14
Early Retirement of Bonds
 Call feature
o Allows issuing company to call (retire) bonds early
o Requires issuing company to pay investors amount > face value if retiring
BEFORE maturity date
Call price = face value x call %
Gain/loos = call price – book value
 If cash paid < book value  gain is recorded
 If cash paid > book value  loss is recorded
Effect on Statement of Cash Flows
 Receipts & payments to bondholders (w exception of interest expense) are recorded
under cash flows from financing activities
 Issuance of bond  cash inflow (addition)
 Repayment of principal  cash outflow (subtraction)
 On income statement  net income (under operating activates, not financing
activities)
o Payments of interest
o Gains/losses on bonds
Advantages of a Corporation
 Simple to become owner
 Easy to transfer ownership
 Limited liability
 Separate legal entity
o Own assets
o Sue/be sued
o Incur liabilities
o Enter contracts
Shareholder Rights
 Voice in management
o Vote @ shareholder meetings on major issues concerning management
 Dividends
o Receive portion of share of distribution of net earnings
 Residual Claim
o Receive a portion of the distribution of remaining assets upon liquidation
Authorized, Issued, & Outstanding Shares
 Authorized # of shares  Max # shares that can be issued
 Issued # of shares  total # of shares issued to date
 Un-issued # of shares  # of shares that have never been issued to date
o Example
Authorized shares 100 000

15
 Issued shares (30 000)
Un-issued shares 70 000
 Treasury shares  shares issued to investors & reacquired by issuing corporation
 Outstanding # of shares  # of shares currently owned by shareholders
o Example
Authorized shares 100 000
Treasury shares (1 000)
Un-issued shares (70 000)
Number of shares outstanding 29 000
Common Share Transactions
 Common shares (issued by all corporations)
o Basic voting shares
o Aka residual equity  ranked after preferred shares for dividends & asset
distribution
 Preferred shares (issued by some corporations)
o No voting rights
o Less risky than common shares
o Fixed dividend rate
o Convertible Preferred Shares  can be exchanged for common shares
o Redeemable/Callable Preferred Shares  can be repurchased
o Retractable Preferred Shares  can be redeemed at option of shareholder
Dividends on Common Shares
 Declaration Date: date on which board of directors officially approved the dividend
 Date of Record: date on which corporation prepares list of current shareholders
o Dividends only payable to names of the list on the record date (NO journal entry)
 Payment Date: date on which cash is distributed to pay dividend liability
 Requirements of cash dividends
o Sufficient retained earnings
o Sufficient cash
Dividends on Preferred Shares
 Current dividend preference  current preferred dividends MUST be paid first
 Cumulative dividend preference  any unpad dividends from prev years (dividends in
arrears) MUST be paid before first
No Par Value & Par Value Shares
 Par value
o Nominal value per share (established in charter of corporation)
o No relationship to market value per shares
o CBCA & most provincial corporations PROHIBIT issuance of par value shares
 Non par value
o Do not have amt per share specified in charter
Initial Sale of Shares

16
  IPO (Initial Public Offering)  first sale of a firm’s shares to the public
Sale of Shares in Secondary Markets
 Transactions between investors
 Corporation does not give up/receive anything from transactions
Shares Issued for Non-cash Assets/Services (compensation in the form of shares)
 Shares issued to acquire assets or services recorded at fair value of assets/services
 Stock options
o Must be estimated & reported as compensation expense associated w stock
options on statement of earnings
Repurchase of Shares
 When cancelled, appropriate share capital account is reduced by amt = avg issuance
price per share
 If purchase price < avg issuance price difference is credited to contributed surplus
 Repurchasing shares ≤ avg issue price ≠ profit for issuing company bc that are capital
transactions, not operating transactions
 If purchase price > avg issue price difference is debited to contributed surplus &
retained earnings
 Retained earnings is reduced bc excess of purchase price OVER contribution made
previously by shareholders reflects firm’s profitable operations (leads to increase net
earnings & share price)
Stock Dividends
 Distribution of additional shares of a firm’s share capital to shareholders on a pro rata
basis
 Pro rata basis  each shareholder receives additional shares equal to % of shares
already held (proportionally)
 For small stock dividends (less than 20-25% of outstanding shares) the amt transferred
from retained earnings to common shares account is based on market price per shares
at date of declaration
 For large stock dividends amt transferred is based on average issue price per share
 Stock dividend does NOT change total shareholders’ equity (only balances on specific
accounts)
 Stock dividend to be issued is credited instead of common shares account until shares
are issued
Stock Splits
 Total # of authorized, issued, &
outstanding shares are increased by a
specified #
 BOTH stock dividend & stock split
 shareholders receive more shares
but do not pay to acquire them
 No journal entry required (disclosed in
notes to financial statements)

17
Measuring & Reporting Changes in Shareholders’ Equity
 In addition to contributed capital (common shares, preferred shares, & contributed
surplus) there are:
 Retained Earnings
o Prev net earnings
Less: dividends declared since first day of operations
o Adjustments to Retained Earnings
 Correction of a material accounting error in prior period
 Change in accounting policy
 Accumulated Other Comprehensive Income (loss) (AOCI)
o Reflection financial effect of events that cause changes in SE (other than
investments by shareholders or distribution to shareholders) – unrealized
gains/losses bc of valuation of specific assets/liabilities at fair value
Restrictions on the Payment of Dividends
 Constraints on ability to pay dividends
o Debt covenants
o Preferred stock dividends in arrears (unpaid dividends from prev years)
Accounting for Owner’s Equity for Sole Proprietorships & Partnerships
 OE for Sole Proprietorship
o Capital account (for proprietor)  reflects cumulative total of all investments by
owner + all earnings - withdrawals
 Records investments by owner & accumulates periodic net earnings/loss
o Drawing/withdrawal account (for proprietor)
 Records withdrawals of cash/other assets
 Closed to capital account at end of each period
 OE for a Partnership
o Advantages
 Ease of information
 Complete control by partners
 Lack of income taxes on business itself
o Disadvantages
 Unlimited liability
Regulators
 CSA – Canadian Securities Administrators
o Protect & maintain integrity of securities market
 AcSB – Accounts Standards Board
o Set GAAP in Canada
 Canadian Public Accountability Board
o Federal agency  oversees Canadian accounting firms (independent auditors)
that perform audits for public companies
 Corporate Governance Standards (stock exchanges)
o Set corporate governance standards (along w public govts)
Management – responsible for information in financial statements

18
  CEO  highest officer in company
 CFO  highest officer associated w financial & accounting side of business
 Accounting staff  prepare details of reports & hold most professional responsibility for
accuracy of information
Board of Directors (Audit Committee)
 Board of Directors  ensures processes are in place for maintaining integrity of
accounting, financial statement prep, & financial reporting
 Audit Committee  non-management (independent) directors w financial knowledge,
responsible for hiring independent auditors
Auditors
 Independent auditors  follow auditing standards to assess fairness of statements
An unqualified (clean) opinion states that the financial statements are fair presentation in all
material respects in conformity w IFRS & other accounting standards
Information Intermediaries – analysis & advice
1. Receive accounting reports & other information about the company
2. Gather information through conversations w company execs & visits to
facilities/competitors
3. Results of analyses are combined  analyst reports
Users: Institutional Investors & Private Investors, Creditors, & Others
 Institutional Investors  pension, mutual endowment, & other funds that invest on behalf
of others
 Private Investors  individuals who purchase shares in companies
 Lenders or Creditors  suppliers, banks, commercial credit companies, & other
institutions that lend money to companies
The Disclosure Process – Press Release
 Earnings Call  announces quarterly & annual earnings
Annual Reports: PRIVATE firms
 4 basic financial statements
 Related notes
 Report of independent accountants (auditor’s opinion) if statements are audited
Annual Reports: PUBLIC firms
 Non-financial section
o Includes letter to shareholders, description of management’s philosophy,
products, successes, etc.
 Financial Section
o Provincial securities commission regulators set minimum disclosure standards
 Summarized financial data for past 5-10 years
 Management Discussion & Analysis (MD&A)
 4 basic financial statements
 Notes to the financial statements

19
  Independent Accountant’s Report (Auditor’s opinion) & Management Certification
 Share price information
 Summaries of unaudited quarterly financial data
 Lists of directors & officers of the company/relevant addresses
Quarterly Reports
 Begins w short letter to shareholders
 Condensed unaudited Statement of Earnings & Statement of Changes in
Shareholders’ Equity are OMITTED
 Some notes to the financial statements are sometimes omitted
Financial Statement Analysis
 Past performance  net earnings, sales volume, cash flows, ROI, EPS
 Present conditions  assets, debt, investors, key ratio
 Future performance  sales & earnings trends
 Management  use accounting data to make product pricing & expansion decisions
 External decision makers  use accounting data for investment, credit, tax, & public
policy decisions
 Comparisons
o Time series analysis  examines a single company to ID trends over time
o Comparison w similar companies  insight regarding relative performance
Common Size Analysis
 Express financial data (entire financial statements), in relation to a single statement item
or base
 Vertical Common-size Analysis (highlights composition & ID what’s important)
o Balance sheet  each item as a percent of TOTAL ASSETS
o Income statement  each item as a percent of TOTAL NET REVENUES
o Cash flow  each line as a percent of SALES, ASSETS, or TOTAL IN & OUT
 Horizontal Common-size Analysis (highlights items that have changed unexpectedly
OR have unexpectedly remained unchanged)
o Percent increase or decrease of each item from prev. year or showing each year
relative to a base year
Financial Ratios
 Express one # in relation to another  Leading to difficulty selling equity
 Standardize financial data expressed  high debt ratio
as percentages, time, or days  Leading to high cost & risky
 Ratios are interrelated funding  higher interest rate 
 Inefficient firm  low turnover in high interest expense  poor
assets, receivable, inventory profitability
 Likely poor profitability  low  Ratios are INDICATORS (of relative
return on sales, assets, equity activity, profitability, liquidity,
 Leading to low market valuation solvency, etc.)
 low price-earnings ratio
Types of Ratios

20
  Activity Ratios (aka Asset Utilization or Operating Efficiency Ratios)
o Low/declining ratios
 Low sales
 Heavy investment in assets (find reasons why)
 Inventory, Receivables, & Payables Ratios
o Days Inventory Held
 Low/declining  better efficiency
 Too high  obsolete inventory/slowing sales (high inventory may result
from preparation for an increase in sales
 Too low  shortages & missed sales
o Days in Sales Receivables
 Low/declining  better efficiency
 Too high  credit issues
 Too low  stringent credit policies (could hurt competitiveness)
 Compare credit period allowed by a company, sales growth relative to
industry, actual credit loss
o Days Payable Outstanding
 Avg # days to pay suppliers
 Days as high as possible (w/o harming supplier relations)  better
efficiency
 Too long/lengthening period  impending liquidity issues OR suppliers
offering longer payment terms
 Compare other liquidity & solvency indicators
 Liquidity
o How well positioned is the firm to meet its near-term obligations
 Measure of Profitability
o What ROR (return on revenue) has the firm earned on the shareholders’ equity it
had available during the year?
Underlying Factors of ROE
 Profit Margin  indicator of profitability (how many $ of income company can
generate per $ of revenue)
 Turnover (aka asset turnover ratio) indicator of efficiency (how many $ of revenue
can the company generate per $ of asset)
 Leverage  indicator of solvency (how many $ of assets are supported by each $ of
equity)
 Finding the source of the firm’s ROE
o To what extend was it derived from…
 Selling a high margin product or keeping expense low? – deriving more
profits from each $ of sales? (ROI, net profit margin)
 Generating higher sales from a lower investment in assets? (efficient use
of assets, aka turnover/efficiency)
 Investing a lower amount of equity? – using more debt in capital structure
(financial leverage)
Valuation Ratios: Price-to-Earnings Ratio
 EPS is portion of net income attributed to each shareholder

21
  P/E relates EPS to CMV of shares

22
Journal Entries:
Journal Entry – deferred revenues
Debit cash (+ A) Credit deferred revenue (+ L)
Journal Entry – adjusting deferred revenues
Debit deferred revenue (- L) Credit revenue (+ R, + SE)
Journal Entry – accrued Revenues
Debit receivable account (+A) Credit revenue (+ R, + SE)
Journal Entry – deferring expenses
Debit prepaid expense (+ A) Credit cash (- A)
Journal Expense – adjusting deferred expenses
Debit expense (+ E, - SE) Credit expense payable (+ L)
Journal Entry – recording a transaction at a discount
Debit cash (+ A) & credit card Credit sales revenue (+ SE)
discounts (% of transaction + E/-
SE)
Journal Entry – original sale (perpetual)
Debit AR (+ A) & cost of sales (+ E) Credit sales revenue (+ SE) & inventory (-
A)
Journal Entry – return of item (perpetual)
Debit sales returns & allowances (- Credit AR (- A) & cost of sales (- E)
SE) & inventory (+ A)
Journal Entry – writing off specific uncollectible accounts
Debit allowance for doubtful Credit AR (- A)
accounts (+ E)
Journal Entry – recovery of previously written off accounts
Debit AR (+ A) Credit allowance for doubtful accounts (-
E)
Journal Entry – recovery of debts
Debit cash (+ A) Credit AR (- A)
Journal Entry – disposal of PP&E (sale, trade-in, retirement, etc.)
Debit cash (+ A) & accumulated Credit asset (- A)
depreciation (+ contra) & gain/loss
on asset (+/- SE)
Shown separately on statement of earnings AFTER earnings from operations
Journal Entry – payroll & employee deductions

23
 Debit compensation expense (+ E) Credit liability for income taxes withheld
(+ L), EI payable (+ L), cash (- A)

Journal Entry – CPP contribution

Debit compensation expense (+ E) Credit CPP payable (+ L  140% of EI),
EI payable (+ L)
Journal Entry – recording taxes
Debit cash (+ A) Credit revenue (+ R), GST payable (+ L),
PST payable (+ L) OR taxes payable (+ L)
Journal Entry – when borrowing
Debit cash (+ A) Credit notes payable (+ L)
Journal Entry – interest at end of period
Debit interest expense (+ E, - SE) Credit interest payable (+ L)
Journal Entry – paying interest
Debit interest payable (- L) Credit cash (- A)
Journal Entry – warranty on sale of product
Debit warranty expense (+ E, - SE) Credit warranty payable (+ L)
Journal Entry – recording PV of non-interest bearing note
Debit asset account (+ A) Credit note payable (+ L)
Journal Entry – (implied) interest expense on non-interest bearing note (end of period
between initial recording & maturity date recording implied interest on accounts)
note payable balance x Debit interest expense (+ Credit note payable (+ L)
market rate E, - SE)
Journal Entry – PV of an asset bought on credit
Debit asset account (+ A) Credit note payable (+ L)
Journal Entry – adjusting PV of asset bought on credit
(note payable balance x Debit note payable Credit cash (- A)
market rate) (annual payment – implied
interest, - L), interest
reduction in note payable
expense (+ E, - SE)
is transferred in interest
expense (implied interest)
Journal Entry – acquiring short term lease
Debit lease expense (+ E, - SE) Credit cash (- A)
Journal Entry – acquiring a leased asset
Debit lease asset (+ A) Credit lease liability (+ L)
Journal Entry – selling a bond at par

24
 Debit cash (+ A) Credit bonds payable (+ L)
Journal Entry – accruing interest payments of bonds (interest payment after end of period)
Debit interest expense (+ E, - SE) Credit interest payable (+ L)
Journal Entry – selling a bond at a discount
Debit cash (issue price, + A) & Credit bonds payable (+ L)
discount on bonds payable
(discount value, - L)
Journal Entry – recording interest payment (discount bonds)
Debit interest expense (+ E, - SE) Credit bond discount (amortized amt, + L)
& cash (interest premium, - A)
Journal Entry – selling a bond at a premium
Debit cash (+ A) Credit bond premium (premium value, +
L) & bonds payable (+ L)
Journal Entry – recording interest payment (premium bonds)
Debit interest expense (+ E, - SE) & Credit cash (- A)
bond premium (- L)
Journal Entry – early retirement of bonds
Debit bonds Debit/Credit loss/gain on Credit cash (call price, -
payable (- L) & bond call (+ E) A)
bond premium (-
L)
Journal Entry – Initial Sale of Shares
Debit assets (+ A) Credit common shares (+ SE)
Journal Entry – stock options
Debit compensation expense (+ E, - Credit shares outstanding (+ SE)
SE)
Journal Entry – repurchasing shares < avg issuance price
Debit common shares (# shares x Credit cash (value of avg issuance price, -
avg price, - SE) A) & contributed surplus (+ SE)
Journal Entry – repurchasing shares > avg issuance price
Debit common shares (# shares x SE) & retained earnings (remainder
avg price, - SE) & contributed left, - SE)
surplus (up to balance of account, -

Credit cash (- A)
Journal Entry – declaration date
Debit dividends declared– common Credit dividends payable – common (+ L)
(- SE)

25
Journal Entry – payment date
Debit dividends payable – Credit cash (- A)
common (- L)
Journal Entry – declaration of stock dividend
Debit dividends declared – stock dividend x market price on
common (# of shares outstanding x $ date of declaration, - SE)
Credit stock dividend to be issued (+ SE)
Journal Entry – issuance & distribution of additional shares
Debit stock dividend to be issued (- Credit common shares (+ SE)
SE)

26